Hart Fraeme Gallery

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Art Sales Custom Framing Business Plan

Financial Plan

Hart Fraeme Gallery will secure a short-term loan to purchase essential equipment and inventory. By opening for business at the start of the industry's busy season, the company expects to operate for several months with a positive cash influx. This will make it possible for Hart Fraeme Gallery to meet its financial obligations for the remainder of the year.

The company also expects to be able to increase consumer awareness and its customer base to maintain a healthy level of growth over the next several years. This will be made possible through advertising, as well as through word-of-mouth recommendations by exceeding industry standards and customer expectations for order completion time.

Finally, Hart Fraeme Gallery will minimize costs by using its small business, personal nature to build and maintain an enthusiastic, dependable, and flexible workforce.

8.1 Projections

8.2 Start-up Funding

At this time, Mr. Fraeme has purchased and framed several pieces of artwork, and will provide many of the necessary tools and peripherial equipment for framing, as well as a vehicle to transport equipment and materials. He will also be providing office and break room furnishings, including a computer, tables, desks, chairs, filing cabinets and a refrigerator. In addition to these assets Mr. Fraeme will invest personal savings.

The computerized mat cutter, which represents roughly two-thirds of equipment costs, will be paid for in installments over a period of 48 months via a lease-to-own program, available through the manufacturer.

The initial inventory and materials will be purchased on Net-30 terms, with a possible financing option.

Financing will need to be secured for these and remaining expenses.

Start-up Funding
Start-up Expenses to Fund $19,500
Start-up Assets to Fund $80,500
Total Funding Required $100,000
Assets
Non-cash Assets from Start-up $65,500
Cash Requirements from Start-up $15,000
Additional Cash Raised $5,000
Cash Balance on Starting Date $20,000
Total Assets $85,500
Liabilities and Capital
Liabilities
Current Borrowing $85,000
Long-term Liabilities $0
Accounts Payable (Outstanding Bills) $0
Other Current Liabilities (interest-free) $0
Total Liabilities $85,000
Capital
Planned Investment
Owner $20,000
Investor $0
Additional Investment Requirement $0
Total Planned Investment $20,000
Loss at Start-up (Start-up Expenses) ($19,500)
Total Capital $500
Total Capital and Liabilities $85,500
Total Funding $105,000

8.3 Important Assumptions

Hart Fraeme Gallery makes several important financial assumptions in this plan, as defined below:

  1. Assume access to capital and financing to support our financial plan.
  2. Assume financial progress based on realistic sales to minimum sales against highest expenses.
  3. Assume a steady economy, without major recession that would greatly hinder our target market's access to their personal luxury finds.

8.4 Break-even Analysis

For the purposes of a break-even analysis, Hart Fraeme Gallery assumes per month fixed operating costs as shown below. This includes payroll, rent, utilities, and other costs associated with operating an art gallery and custom frame shop. The analysis shows that $30,553 in sales is required to break even, which is roughly 11% below estimated monthly sales for the first year.

In terms of units sold, the business must achieve sales of roughly 3-4 frame orders and 1-3 pieces of artwork on an average day. Because these numbers are approximately 15%-30% below industry norms, Hart Fraeme Gallery is confident that it can maintain its break-even figures.

Break-even Analysis
Monthly Revenue Break-even $29,269
Assumptions:
Average Percent Variable Cost 35%
Estimated Monthly Fixed Cost $18,985

8.5 Projected Profit and Loss

Hart Fraeme Gallery makes several important assumptions in calculating profit and loss:

  1. Sales are estimated at minimum to average values, while expenses are estimated at above average to maximum values. 
  2. Materials expenses will not increase drastically over the next several years, but will grow at a rate that matches increasing consumption.
  3. Rent expenses will also grow at a slow, predictable rate.
  4. Staffing and payroll expansions will be powered by increased sales.
Pro Forma Profit and Loss
FY 2006 FY 2007 FY 2008
Sales $410,550 $481,070 $546,740
Direct Cost of Sales $144,250 $170,220 $202,200
Other Costs of Sales $0 $0 $0
Total Cost of Sales $144,250 $170,220 $202,200
Gross Margin $266,300 $310,850 $344,540
Gross Margin % 64.86% 64.62% 63.02%
Expenses
Payroll $88,320 $95,000 $111,500
Marketing/Promotion $10,250 $10,000 $10,000
Depreciation $3,000 $3,500 $4,000
Rent $48,000 $60,000 $63,000
Percentage Rent $41,200 $48,100 $54,700
Payroll Taxes $13,248 $0 $0
Utilities $19,000 $20,000 $22,000
Insurance $1,800 $1,900 $2,100
Accounting Services $2,400 $2,500 $2,600
Other $600 $750 $900
Total Operating Expenses $227,818 $241,750 $270,800
Profit Before Interest and Taxes $38,482 $69,100 $73,740
EBITDA $41,482 $72,600 $77,740
Interest Expense $7,590 $5,980 $4,300
Taxes Incurred $9,268 $18,936 $20,832
Net Profit $21,624 $44,184 $48,608
Net Profit/Sales 5.27% 9.18% 8.89%

8.6 Projected Cash Flow

The cash flow estimations for Hart Fraeme Gallery hinge on the assumption that the influx of cash from September till February will be strong enough to maintain a positive balance for the remainder of the year. This is especially crucial in the first year, since Hart Fraeme Gallery will not be able to rely on profits from the previous.

Hart Fraeme Gallery is able to employ an effective system to help with cash-flow management. Given the nature of custom framing and the broad scope of materials available, it is most practical to purchase materials for framing after an order has been placed. Combined with the current system for payment on custom framing orders, (50% due on order, with the remainder due upon receipt) this system is advantageous for cash-flow management.

Pro Forma Cash Flow
FY 2006 FY 2007 FY 2008
Cash Received
Cash from Operations
Cash Sales $410,550 $481,070 $546,740
Subtotal Cash from Operations $410,550 $481,070 $546,740
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $0 $0 $0
New Other Liabilities (interest-free) $0 $0 $0
New Long-term Liabilities $0 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $0 $0 $0
Subtotal Cash Received $410,550 $481,070 $546,740
Expenditures FY 2006 FY 2007 FY 2008
Expenditures from Operations
Cash Spending $88,320 $95,000 $111,500
Bill Payments $263,499 $332,284 $380,982
Subtotal Spent on Operations $351,819 $427,284 $492,482
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $16,800 $16,800 $16,800
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $0 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $6,240 $6,240 $6,240
Dividends $0 $0 $0
Subtotal Cash Spent $374,859 $450,324 $515,522
Net Cash Flow $35,691 $30,746 $31,218
Cash Balance $55,691 $86,437 $117,656

8.7 Projected Balance Sheet

The figures in the Projected Balance Sheet are promising, indicating a slow but steady increase in net worth. Hart Fraeme Gallery does not foresee any difficulty in meeting its financial obligations, provided that revenue predictions are met.

Pro Forma Balance Sheet
FY 2006 FY 2007 FY 2008
Assets
Current Assets
Cash $55,691 $86,437 $117,656
Inventory $9,100 $10,738 $12,756
Other Current Assets $3,500 $3,500 $3,500
Total Current Assets $68,291 $100,676 $133,911
Long-term Assets
Long-term Assets $45,240 $51,480 $57,720
Accumulated Depreciation $3,000 $6,500 $10,500
Total Long-term Assets $42,240 $44,980 $47,220
Total Assets $110,531 $145,656 $181,131
Liabilities and Capital FY 2006 FY 2007 FY 2008
Current Liabilities
Accounts Payable $20,207 $27,947 $31,615
Current Borrowing $68,200 $51,400 $34,600
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $88,407 $79,347 $66,215
Long-term Liabilities $0 $0 $0
Total Liabilities $88,407 $79,347 $66,215
Paid-in Capital $20,000 $20,000 $20,000
Retained Earnings ($19,500) $2,124 $46,308
Earnings $21,624 $44,184 $48,608
Total Capital $22,124 $66,308 $114,916
Total Liabilities and Capital $110,531 $145,656 $181,131
Net Worth $22,124 $66,308 $114,916

8.8 Business Ratios

Over the next several years Hart Fraeme Gallery is poised to meet or exceed many of the industry-standard ratios. Nevertheless, there are some discrepancies in the ratio comparison; however, many of these can be explained by the fact that Hart Fraeme Gallery does business in two separate but related industries: art and framing. Because much of the business Hart Fraeme Gallery does will be custom framing, the ratios used for the industry standard are for picture framing, using the Standard Industrial Classification code 7699.1809. In some cases, the ratios for artwork sales are much different. The following ratios are particularly worth noting:

  • Sales Growth - Because Hart Fraeme Gallery will be a new business, the ratio for sales growth is expected to be somewhat inflated for the first few years that the company is in business.
  • Assets - In general, the ratios for Hart Fraeme Gallery's assets are between the industry standard ratios for the two industries.
  • Gross Margin - Due to the difference in wholesale ratios between artwork and framing materials, the ratio for Hart Fraeme Gallery is again higher than the ratio for artwork sales but lower than the ratio for picture framing.
  • Selling, General, and Administrative Expenses - Again, Hart Fraeme Gallery's ratio is higher than for artwork sales but lower than picture framing.
  • Returns on Net Worth, Assets, and Equity - Many of these figures seem heavily exaggerated due to the fact that Hart Fraeme Gallery is a new company and thus has marked initial growth for net worth, assets, and equity.
Ratio Analysis
FY 2006 FY 2007 FY 2008 Industry Profile
Sales Growth 0.00% 17.18% 13.65% 4.89%
Percent of Total Assets
Inventory 8.23% 7.37% 7.04% 13.95%
Other Current Assets 3.17% 2.40% 1.93% 30.83%
Total Current Assets 61.78% 69.12% 73.93% 66.56%
Long-term Assets 38.22% 30.88% 26.07% 33.44%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 79.98% 54.48% 36.56% 29.31%
Long-term Liabilities 0.00% 0.00% 0.00% 21.88%
Total Liabilities 79.98% 54.48% 36.56% 51.19%
Net Worth 20.02% 45.52% 63.44% 48.81%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 64.86% 64.62% 63.02% 100.00%
Selling, General & Administrative Expenses 59.60% 55.43% 54.13% 83.47%
Advertising Expenses 0.00% 0.00% 0.00% 0.56%
Profit Before Interest and Taxes 9.37% 14.36% 13.49% 2.99%
Main Ratios
Current 0.77 1.27 2.02 1.80
Quick 0.67 1.13 1.83 1.16
Total Debt to Total Assets 79.98% 54.48% 36.56% 59.36%
Pre-tax Return on Net Worth 139.63% 95.19% 60.43% 6.07%
Pre-tax Return on Assets 27.95% 43.34% 38.34% 14.93%
Additional Ratios FY 2006 FY 2007 FY 2008
Net Profit Margin 5.27% 9.18% 8.89% n.a
Return on Equity 97.74% 66.63% 42.30% n.a
Activity Ratios
Inventory Turnover 11.88 17.16 17.21 n.a
Accounts Payable Turnover 14.04 12.17 12.17 n.a
Payment Days 27 26 28 n.a
Total Asset Turnover 3.71 3.30 3.02 n.a
Debt Ratios
Debt to Net Worth 4.00 1.20 0.58 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital ($20,116) $21,328 $67,696 n.a
Interest Coverage 5.07 11.56 17.15 n.a
Additional Ratios
Assets to Sales 0.27 0.30 0.33 n.a
Current Debt/Total Assets 80% 54% 37% n.a
Acid Test 0.67 1.13 1.83 n.a
Sales/Net Worth 18.56 7.26 4.76 n.a
Dividend Payout 0.00 0.00 0.00 n.a